That was the week that was – Sunday March 6, 2016


The rebound in the oil price and in emerging markets dominated the week’s news. The spark may well have been William Dudley, the third most important Fed member, expressing newly cautious outlook on growth, inflation and financial market confidence. It meant both bad and good news on the data front could be taken as good news.

We had expected the market to be dull at the start of the week following the stronger than expected inflation data being thought to drive the data-driven Fed. And on Monday this seemed to be occurring until up popped Dudley overnight on Monday to reassure markets and pave the way for a risk-on rally. Such is the power of the Fed!

The US dollar didn’t drop back immediately but had given up its prior week rally by Friday. The bond markets increased across the curve with the 12m short end up by nearly 10 basis points, the 2 year benchmark up similarly, while the 10 year was up 14bps. A yield curve steepening is a good sign.

This didn’t really reflect expectations of a March rate rise, Dudley seems to have capped those, but the potential inflation risk and rally in commodities and emerging markets may well have just led to naturally higher market expectations for nominal growth. We have seen that when the Fed tries to get ahead of the curve, as it were, and force a rise in rates it has precisely the opposite effect on the yield curve. A rise in late 2016 is now the most likely case according to the CME futures markets.

The end of the week jobs data was taken positively also as it indicated both lower wage growth so less likelihood of a Fed hike yet still strong jobs growth.

Topic: Euro Area almost catches US growth in the fourth quarter

Euro Area, despite all the noise nearly caught up with US NGDP growth in Q4. Now that Italy and Spain have finally reported their Nominal GDP figures for 4q we can say that NGDP growth for the Euro monetary region as a whole was almost as fast, year-on-year, as the US.

Although Eurostat has yet to release the official data a sum of the larger countries accounting for 97% of NGDP shows that growth was 2.76% YoY in 4Q15. This was a touch lower than the 2.83% shown in 3Q but still respectable.

The biggest three, Germany, France and Italy all slowed a little, particularly Italy. This is bad news for Italy that really needs to see higher nominal growth to help it grow out of its acute banking industry and bad debt problems. Unless it leaves the Euro it will have to undertake a major bad debt clean up without costing the government so much money that it has also to undertake further austerity and thus exacerbate the bad debt problem. It is a tense situation. Greece redux? I hope not but Italy is certainly not helped much by an ECB still stuck with its hopeless inflation ceiling targeting regime undermining the QE and other measures. New thinking, new targets are desperately required at the ECB.

Spain has largely addressed its banking bad debt problems and undertaken painful austerity and repricing of its domestic economy. The cost is still very high in terms of unemployment, but from its horribly low base it has continued to accelerate hitting 4.25% in 4Q.

Portugal showed a good improvement too. Netherlands was the standout disappointment, possibly because of the energy and other trade related to its important entrepot status.


On Tuesday the “official” Purchasing Managers Institute (PMI) ISM Manufacturing survey still showed shrinkage in February after a weak January, but was not as bad as expected.

Funnily enough an “unofficial” survey of manufacturing, from Markit, confirmed their more downbeat “flash” estimate for February from the previous week. But that was old news. We now await the actual February manufacturing data from the Fed on 16th March, a 75% subset of its Industrial Production data.

The release feeds back into the GDP by Output measure created by the BEA. Data releases sure come from a lot of different sources in the US creating quite a patchwork of confusion. The CPI data come from the BLS while the BEA produces the PCEPI so closely watched by the Fed and used to deflate Nominal GDP to get RGDP.

On Friday jobs data and wage growth showed divergent trends. More jobs but slower wage growth than expected, huh? Well, this is not puzzling for Market Monetarists who understand wage growth is driven by nominal GDP growth, under the control of the Fed, while unemployment is a function of both the participation in the labour force and the numbers of people within the labor force who are employed.

Unemployment was stable on the month but the participation rate rose slightly as the still growing economy pulled more workers into the official labour force. [Go to Data Watch for a fuller discussion.] A lesser factor is that most of the new jobs are in lower-paying areas of the dominant service sector drags down average wage growth, and also lowers productivity.

The Atlanta Fed GDPnow model was impressed by the job creation, with the total new jobs more than offsetting the weaker wage growth and thus raising the estimated growth of total real consumer expenditure and private domestic investment. Although at just 2.2% QoQ it is not that exciting, but does imply a 2.4% growth in RGDP and a rebound in NGDP growth YoY to 3.5% .
This week there is no significant hard economic data for the US being released. The tone will be set by Fed number two Stanley Fischer speaking on Monday. Last week Dudley, the number three, was reassuring. But Fischer’s disastrously hawkish “four more hikes” interview on 6th January is still fresh in people’s minds.

The bigger central bank action could come from the six-weekly ECB meeting. Expectations are quite high that Draghi will introduce further measures, especially a drop in rates to even more negative levels. Lower rates are better than doing nothing, but relatively ineffective compared to discussing raising the inflation target or far better introducing or at least monitoring NGDP growth.

Draghi disappointed markets last time out in December, his track record on surprising positively, when he has to, is good. Prior to the January meeting the big guns on the ECB board from Germany made some seemingly hawk’ish comments.

They have been quiet this time around, possibly due to German RGDP, NGDP, inflation, and long term bond yields all weakening. Germany needs faster growth, particularly to offset the political pressers on Mrs Merkel. What is good for Germany usually is not so for the Euro Area. This time around, however, it should be positive. Awfully selfish, awfully true.


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